IMF Greenlights Addition Of Chinese Yuan To SDR Basket: Wall Street Responds

Tyler Durden's picture

While the world was following the tragic events unfolding on Friday night in France where hundreds of innocent civilians were killed or injured, an important economic development took place at the IMF, whose staff and head Christine Lagarde, officially greenlighted the acceptance of China's currency - the Renminbi, or Yuan - into the IMF's foreign exchange basket, also known as the Special Drawing Rights.

As Reuters summarizes, the recommendation paves the way for the Fund's executive board, which has the final say, to place the yuan on a par with the U.S. dollar Japanese yen, British pound and euro at a meeting scheduled for November 30. At this point only an explicit veto by US political interests deep behind the stage can derail the CNY's ascension into the SDR. The United States, the Fund's biggest shareholder, has said it would back the yuan's inclusion if it met the IMF's criteria, a U.S. Treasury spokesperson said, adding: "We will review the IMF’s paper in that light."

If the yuan's addition wins 70 percent or more of IMF board votes, it will be the first time the number of currencies in the SDR basket - which determines the composition of loans made to countries such as Greece - has been expanded."

 

I would say that the likelihood of China's yuan joining the IMF currency basket this year is very high," said Hong Kong-based Shen Jianguang, chief economist at Mizuho Securities Asia.

 

"The only thing that could deter this is if the U.S. led a group rejecting the yuan's inclusion, which could complicate things. But the United States' current official stance doesn't reflect such an attitude," he said.

Unless something dramatically changes in the next three weeks, of course, although that seems unlikely: moments ago Bloomberg reported that Treasury Secretary Lew met with Chinese Vice Premier Wang Yang and Finance Minister Lou Jiwei on the sidelines of the G-20 Leaders Summit in Antalya, Turkey, according to readout sent via e-mail by U.S. Treasury, where “Secretary Lew reiterated that the United States intends to support the Renminbi’s inclusion in the Special Drawing Rights basket provided the currency meets the International Monetary Fund’s existing criteria."

The executive board, which represents the Fund's 188 members, is seen as unlikely to go against a staff recommendation and countries including France and Britain have already pledged their support for the change. This would take effect in October 2016, during China's leadership of the Group of 20 bloc of advanced and emerging economies.

As Reuters further adds, joining the Special Drawing Rights (SDR) basket would be a victory for Beijing, which has campaigned hard for the move, and could increase demand for the yuan among reserve managers as well as marking a symbolic coming of age for the world's second-largest economy. In an ironic twist,, while the IMF has historically delayed the moment of acceptance, it caved just months after China officially devalued its currency for the first time in decades to stimulate its exports, and has unleashed an unprecedented campaign (using overt and covert means) to stabilize the Yuan as capital outflows in the past several months have soared.

Reuters is likewise amused by this hypocrisy: "China's heavy-handed intervention to stem a stock market rout over the summer, and an unexpected devaluation of the yuan in August, had raised some doubts about Beijing's commitment to reforms."

Unless, of course, the whole facade of "reform" is just an epic smokescreen and what the IMF is truly rewarding is gross market manipulation and currency warfare, such as what all developed nations have engaged in since the great financial crisis.

Singapore-based Commerzbank economist Zhou Hao said China needs to further accelerate domestic reforms and improve policy transparency. "The PBOC should reduce the frequency of market intervention, allowing market forces to really play a critical role."

No matter what the real reasons behind the historic development, IMF said its staff had found the yuan met the criteria of being “freely usable,” or widely used for international transactions and widely traded in major foreign exchange markets, Lagarde said. “I support the staff’s findings," she said in a statement immediately welcomed by China's central bank, which said it hoped the international community would also back the yuan's inclusion.

Still, even if formally accepted, few if any reserve managers will rush out to buy Yuan: China's extensive capital controls mean it would take a while before the yuan rivals the dollar's dominant role in international trade and finance, analysts say.

Its closed capital account still limits foreigners from buying yuan-denominated assets and places caps on how much cash residents can take out of the country. These restrictions, along with concerns that the yuan is set to come under steady depreciation pressure, may cause corporates to back off from holding yuan.

Nonetheless, the People's Bank of China said the IMF statement was an acknowledgment of the progress China had made in reforms and opening up its economy.

We suppose by that it means arresting stock shorters, prominent fund managers, doubling margin requirements at will, and crushing anyone who dares to sell the currency in the "open market."

Putting aside this latest glaring example of globalist hypocrisy, here are the initial early responses by various Wall Street analysts.

HSBC:

  • SDR inclusion would encourage China to stick to much- needed financial and capital-account liberalization, Paul Mackel, HK-based head of global research, writes in note dated Nov. 14
  • USD/CNH moved above 6.4000 on Friday, which could suggest that more flexibility on yuan is coming
  • Market players will want to see more volatility in the currency eventually; hence, inclusion in SDR doesn’t necessary mean that the RMB will be stronger
  • Knee-jerk reaction for yuan to strengthen should be temporary; will be interesting to see if PBOC decides to become more hands-off

Commerzbank:

  • China needs to show commitment to further opening up its capital account and accelerate domestic financial reforms, led by interest-rate liberalization, Zhou Hao, Singapore-based senior economist, writes in email
  • Country needs to improve policy transparency to attract global investors; that would build trust between global investors and Chinese authorities
  • PBOC should reduce frequency of intervention, allowing market forces to play a critical role
  • China should provide more hedging options to corporates and financial institutions, so they can prepare for greater financial-market volatility

Huabao Trust:

  • China stepped up rates liberalization in run-up to SDR inclusion; now it may increase pace of financial reform, Nie Wen, Shanghai-based economist, says in phone interview
  • Onshore-offshore yuan spread is expected to narrow in coming days
  • PBOC’s monetary policy stance will still be the most important element for investors to gauge regarding the yuan’s trading direction
  • A more market-oriented system is crucial for Chinese capital markets; a “reasonable” pricing of domestic assets will reduce systemic risk

Maybank:

  • Inclusion will largely be a symbolic move because slowing economy and capital-outflow pressures may delay FX reforms, Fiona Lim, senior FX analyst, says in phone interview
  • SDR inclusion will improve “rationality” in investment and assets allocation, which will improve financial stability

SocGen:

  • Any positive reaction on yuan’s possible inclusion in IMF reserves to be short-term, given that the outcome was well priced in, says Jason Daw, head of Asia currency strategy at Societe Generale SA in Singapore.
  • Being added to SDR unlikely to speed up the pace of reserve diversification into Chinese assets, Daw says in Nov. 14 e- mail interview
  • “We continue to see an upward bias to USD/CNY over the coming months and expect it to reach 6.80 by mid-2016.”

* * *

It would be most ironic, however, if China achieves its ultimate objective, which is simply to find foreign buyers for its currency as an offset to domestic outflows, which in turn sends the Yuan soaring beyond its pre-devaluation levels, thereby slamming the Chinese economy even further and assuring that the unfolding Chinese hard landing becomes a full-blown global crash .

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Francis Marx's picture

Yuan goes up, markets evenually crash. OK, but arent we heading in that direction anyways?

VinceFostersGhost's picture

 

 

Wormer just dropped the big one.....and I'm NOT going to sit through another lecture on the number 7.

TeamDepends's picture

Was it over when the IMF bombed Pearl Harbor?

remain calm's picture

SDR Replaces the US dollars as world currency as next crisis becomes unmanageable. SDR just another fiat currency that keeps elites in control via IMF. Only way to take power away from criminal elites is to tie it to GOLD. 

knukles's picture

Oh, the hypocrisy of it all.  The Chinese hypocrite market manipulators wanting to join the rest of the world's hypocritical market manipulators, but market manipulation causes concerns for the integrity of the system or some such crap.
Now listen....   The real test of whether China should be recognized as a World Power would be if Chinese Porn became the Staple of Bread and Circuses.   Y'all hear me now?

Wankie wankie rise and shine

Crisismode's picture

 

 

Yuan-a supersize that Happy Meal?

 

DeadFred's picture

Whe cares about all this stuff, what does this do to the price of silver and gold???

Conax's picture

They fall further of course. They only go down.

All financial news is bad for gold.

johngaltfla's picture

One thing for sure; the more fiat currencies they add to the SDR fantasy, the less it will help as it crashes. The Middle East now fully expects a major regional war involving the Europeans and US now and their markets reflect this:

 

11.15 Middle East Stock Markets in Turmoil as Saudi Drops 2.85% Dubai over 3%
markar's picture

Until there is none left in the bullion banks and the Comex warehouses. And they are levered 300:1 now

The central planners's picture

If Gold is leveraged 300 to 1 silver must be 1000 to 1

chunga's picture

It's funny that the world's titans of finance fuck heads call for China to "reform" their swindles, but are silent about their own.

Kayman's picture

If the Yuan is pegged to the USD, then this is just another conceit- a joke.

If China truly is the new powerhouse then let the Yuan float.

RaceToTheBottom's picture

Do Chinese regulators know how to access porn?

Dubaibanker's picture

While none of the currencies globally are viable under the current debt based monetary system but there is no viable solution yet on how to make people around the world use something/anything as a medium of exchange that is divisible and 'trusted' and is 'legal tender'.

Having said that, finding a new system and the costs associated with it will also be very challenging in current difficult times.

We have come thus far post the GFC mainly due to money printing, QE and whatever wars had to be fought.

We must remember that EUR was just born in 1997 and implemented in electronic form in 1998 and from Jan 1999 it became legal tender in currency notes form.

Here is the IMF circular when EUR was added to SDR effective Jan 1999.

IMF Incorporates the Euro into the SDR Valuation and Interest Rate Baskets

 

It is my view that China will keep rising, and IMF's SDR inclusion is just paving the way forward and strengthening the currency. As US loses it's grip on the global monetary system, it is hard for the American Govt hegemons to accept it thus China had to wait until now. If it was me, Chinese yuan would have been in IMF SDR about a decade ago when the manufacturing prowess of China was at it's peak.

We shall have many crises in the years ahead but inclusion of Chinese Yuan in the IMF led SDR basket which is the monetary system AS ON DATE will not make it any worse but slightly better because this will bring stability.

Global trade and spneding is increasingly being done in yuan and most goods are made in China whether we like it or not, and hence all the 210 countries need to have yuan available in their banking systems in order to continue trading with China.

In fact, this will make things slightly cheaper because globally, the wholesalers will not need to price in the FX fluctuations which they currently do when remitting to China.

Screw the big G-7 banks, they always have an agenda of their own survival. Usually they always lie and most analycysts are a pain in the butt anyways.

I am waiting for the day within the next few months when Saudi (post OPEC break up?) will announce acceptance of yuan for oil which will be the last day of the connection between the world's USD based monetary system as we know it and the new monetary system where Yuan will rule the roost over the next few decades.

Every single day, oil remains below USD 50-60 level, the neeed for the world's top 10 oil producers rises more and more and they are choking by this USD based system especially when US is no longer the world's top oil importer.......Why are the Chinese forced to pay in USD when they can simply use CNH....hence Chinese have stopped buying from Saudi and Saudi exports of oil to China have dropped 35% over the last decade.....

Same for India or any other major oil importer, if they buy oil in USD, it makes things that much more expensive due to exchange rates. The day the exporters move away from USD, they have to go closer to CNH being their largest importer of oil which is why inclusion of CNH in IMF's SDR is very important step for China who have got this approval to occur on Nov 30 this year instead of the date announced by IMF a few weeks ago of Oct 2016 for which in all likelihood, US was involved in pushing the day further.

We should hear the news on Dec 1 when the CNH will be included in IMF's SDR and this will be a major game changer because all Govt's will need to hold trillions in CNH in order to assist their domestic banks/importers to pay China in yuan.

GMadScientist's picture

Another perspective is that including the Yuan, but not gold or some other 'hard' currency, in the basket, will not bring stability as much as a new means to export inflation.

 

thesonandheir's picture

Yep, should be based on a basket of hard/soft commodities also. The SDR withouth backing by gold/silver/oil etc will just be a new form of fiat world money, IMF printing presses working overtime.

 

Of course we will not be able to use the SDRs, that will be for the individual countries/massive corporations ect.

 

 

It's all a fugazi without gold.

Max Steel's picture

Saudis are not willing to sell oil in yuan. How long do you think they will hold , with their quickly vanishing FX reserves ? It went from 8XX billion to 60X billion last time when I checked. 

How Yuan will remain stable unlike USD , Chinese will devaluate their currency ? I'm sure they won't allow it to float freely.

How did USD use to fare when US had its manufacturing base+Larges oil importer tag some 3-4 decades ago?  

Saudis said due to Yuan sudden devalue or revalue ation they can't sell oil in Yuans for that they need a stable currency .

I'm all confused Dubai, help me out. 

Dubaibanker's picture

Thanks Max for the opportunity for me to elaborate and for asking the question.

Saudis are Not YET willing to accept yuan but several meetings have been held in Moscow along with Jordan, UAE, Egypt, China and Russia to discuss oil as well as Syria. Hence, the time is coming....

Saudi's holding capacity is diminishing every single day because of the expensive wars, largesse spending, weak oil and US not being their friend anymore (else why would Saudi visit Moscow, give 16 nuclear reactor order to Moscow and give USD 10bn to Moscow in cash to invest anywehere?). US does not buy much oil from no one least from Saudi except the long term contracts. Oil imports from Saudi by US have also declined more than 35% and will continue to drop. Military bases have been shut among other things.

Countries like Russia have started accepting yuan for oil. LME in UK accepts yuan. Gazprom in Russia accepts yuan. Malaysia accepts yuan. Iran accepts yuan.......Angola accepts yuan for oil and has also made yuan it's legal tender as has Zimbabwe made yuan it's ;legal tender.

So the day is not far when Saudi will have to accept yuan, but question is when? 

I guess within the next 12 months.

Saudis have sold their cash, US treasury holdings and now also their equity holdings which are all public news. Hence, bulk of their liquid assets are gone and now the more illiquid assets will need to be sold or taxes implemented or country will be opened up or bonds will be issued. All this will cause country ratings to be reduced and reserves to continue to diminish at a very rapid pace. Saudi was downgraded to A rating about 2 weeks ago and all their 8 banks were downgraded as well last week. This will continue until they prop up their income as well as reduce their expenses.

To your point that yuan is unstable, I sincerely beg to differ. 

Yuan is THE ONLY currency that has risen over 2 years, 5 years, 10 years and 20 years....

So, this opinion of the biased western analcysts/ever controlling Govts propagated through media as well as Western banks is completely biased and completely opposite of reality. 

Just one look at a 20 year CNH chart will show that what I am saying is true.

Yuan is already floating freely as much as EUR and JPY are floating freely. To suggest that EUR and JPY are not being controlled by their Govts or for that matter any currency anywhere in the world backed by QE, bank manipulation and central bank nonsense in full public view, then I don't have much to say.

USD was a strong currency when it's manufacturing base was strong which is the period from 1900 to 1980. They built railroads, infra, steel plants, banks, gave foreign aid, were morally storng etc. However, since 1980 ever since the Reagan era, unlike UK's Thatcher era, money started being spent for no reason and the US Govt debt mushroomed from below USD 1 trillion to USD 19 trillion and perhaps it is running at USD 65 trilion or whatever nonsense there is.

Since 1980, USA lost it's mojo but was still ok until 9/11 occured and that was the pinnacle of the US empire and the empire has lost control of itself since then.

Ever since 9/11, money was looted, not spent, by whoever could i.e. bankers, MIC, guns, police, surveillance etc because the writing has been on the wall.

Look at where the cuts in th US were. At the space program, at most R&D whether medical or anything else, education, healthcare, infra etc. Even jobs got cut badly and sent overseas in some sort of a rushed manner.

USD would have remained strong if it was not for it's hegemony and giddy ideas of control in all it's senses over the rest of the 7.1 billion people.

Now US economic system cannot stop falling and the world is here to watch and is collaborating against the demise of the US empire. It is not sad because US called this upon itself. Instead of an adversarial approach, US could have chosen the path of least resistance but they used their military everywhere and incidents like Paris, refugee crisis, bans of goods by Russia on Europe, Middle East wars, oil price volatility are the reason why all of us public are paying the price of this lost empire trying to find a grip before slipping away into the annals of history.

Further, if you look at any currency over the last 50 years, they have all declined against the USD because it was doing so well.

UK's GBP used to be at 4.00 and today is at 1.55.

Indian Rupee was at 1:1 to USD in 1947 and today is at 66.

Nigeria used to be at 7 and now is at 260.

This shows how encompassing the US control over the whole world is and was and they could easily hurt any economy of their choice and send inflation to others till the time others have a need for USD.

Meanwhile, I have never seen anyone from Saudi say that they are not convinced of the yuan. Every country in the Middle East and the world over is embracing the yuan. 60 counties already hold yuan in their reserves and over 50 have signed swap agreements and have actually used them in the last 4-5 years. Big exception being USA. USA has not been allowed to have a yuan clearing centre nor any bonds have been issued or listed in USA etc. All this glory is for Europe, Middle East, Asia, Latam, Russia, etc. Everyone but the USA.

Saudis don't have a choice. Either they keep withering away while procrastinating over acceptance of yuan or they choose to accept it immediately and have a better life immediately. 

Choice is completely in the hands of oil producers and Saudis themselves. They are being stopped only by themselves and their wishful thinking of the past and their own non willingness to embrace the future. And of course, the ramifications of the decision are immense and US will become a bitter enemy (just like an ex wife) of Saudi!

The question is not whether Saudis should accept yuan, the question is when will they accept it?

It is the destiny of Chinese yuan to rise. The choice is not even in the hands of China.

We have created factories at a speed of an average USD 100bn for the last 30 years which is about USD 3 trillion of OUR factories inside China. China has played it's cards very well and created a very stable economic system which is rising at a rapid clip regardless of what anyone's views may be.

The model of China is similar to America. US created factories since 1900 until the 1990's and was a strong power. Once the factories stopped being built, US lost it's mojo and the results are for all to see. 

We are also responsible for the rise of China, not just China themselves.

Agstacker's picture

Excellent response, while I think the writing has been on the wall since the creation of the federal reserve in 1913 but there have been several events that have been key points in the demise of the USA -

 

1.  LBJ's 'guns and butter' programs, removing silver from coinage in 1964.

2.  Nixon's gold shock in 1971.

3.  Reagan removing copper from pennies in 1982.

 

Rome started to decline when the politicians of the day began debasing their currency, history may not repeat itself but it sure does rhyme...

HungryPorkChop's picture

I bet a fly on the wall could tell us quite a story why China has been so interested in obtaining large amounts of gold over the past 5 to 10 years.  This accepantce by the IMF probably means the barbaric relic will continue to be capped while every last ounce is accumulated.

delacroix's picture

all other gold rich  countries had to dishoard a portion of their gold to join the imf

ThirteenthFloor's picture

This news should be absolutely no surprise.  Recently the IMF had been broadcasting the same stuff as the Chinese.  USofA was making no IMF payments, China will make IMF payments.  After the decision not to include CNY in IMF basket, China racked the markets for the month.  Then various forecasters all said it would happen...

Low and behold it happend.  No surprise here.

Whether you like China or not, they are the only economy with healthy income and production right now of finished goods, and any kind of economy needs both income as well as spending.

 

GMadScientist's picture

They have a credit bubble that makes the rest of the world green with envy (remember how they were first to "stimulate" after the GFC and they did so like gangbusters?) and no amount of prowess in manufacturing cheap crap will help them, if the rest of the world can't trade with them due to a global depression.

 

ThirteenthFloor's picture

And who invested in that bubble.  US corporations that ran off shore to maintain gross margins.  And congress that passed favorable tax shelters.  And who elected congress ?

There is capital formation in China. But your point is mute, originally the IMF did NOT let China into the IMF why ?  THEY did not have ENOUGH issued debt.  If anyone is envious about debt and credit bubbles, they should envy the debt and bubble kings themselves the USofA.  We get the credit king crown of all history.

 

Vlad the Inhaler's picture

China has something to show for its credit bubble... empty cities and malls for now but maybe one day they can be used, high speed railways across the country, energy projects etc.   As for America, the only thing we have to show for our debt is a handful of billionaires.

Big_Hitman's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.wallstreet34.com

JustObserving's picture

The PBOC should reduce the frequency of market intervention, allowing market forces to really play a critical role.

And the Fed should intervene in the markets every hour instead of every minute.

When was the last time that market forces played a crictical role in US markets?

 

Kaiser Sousa's picture

remember the Golden Rule......

VinceFostersGhost's picture

 

 

Something to do with gold.....it will come to me.

F22's picture

Yes, I remember....He who has all the gold makes the rules....

Mr. Universe's picture

He who prints the most Fiat makes the rules...there fixed it for ya.

umdesch4's picture

He who has the gold has the unfortunate boating accidents.

Amicus Curiae's picture

well as a buyer , if Yuan goes UP that makes the crazy usd to my au$ better and I save money

I rather like that

Occupy Wall Street's picture

"Based on the latest review conducted on December 30, 2010, the XDR(sic) basket consists of the following four currencies: U.S. dollars ($), euro (€), pounds sterling (£), and Japanese yen (¥)"

One more worthless fiat currency thrown in the basket. Why not currency with value, such as PM & BTC?

How long will thier little fantasy continue?

 

Dr. Spin's picture

Not much longer, 'cause I suspect that Paris was just the first of many more to come...

Spoctor Din

spanish inquisition's picture

The inclusion of another corrupt manipulated fiat currency will help bring confidence and stability to the world's finances.

Much like how a basket of sub prime mortgages can be sold as AAA.

Son of Captain Nemo's picture

Yes of course...

Become an official member of the "SDR" as we continue to taunt and threaten you in your own neighborhood with our "peace ships"and when that doesn't work mischief in massive short selling in your markets, destroying your property in various industrial areas inside your borders, just as we have been doing with Russia in Eastern Europe for the last 2 decades...

BRIICS or bust!!!

 

 

Chupacabra-322's picture

SDR = Special Drawing Robbery.

silverer's picture

Well, the elitist stockpilers in the US need a convenient place to run to when the US dollar hits the wall.

Mat Cauthon's picture

Getting into the SDR is a means to an end.  It's the best way for China to usher in full internationalization of the Yuan, leading towards that critical mass where they can break the dollar's hold as the singular reserve currency, and then have enough gravitas to propose a return to gold backed money or trade settlement.

 

 

Dovie'andi se tovya sagain (It's time to toss the dice)

The Daily Economist

RaceToTheBottom's picture

China does not want to be a single reserve currency.

China does not want to be part of a gold backed currency.

 

They want to be able to do what the US has done for the last 50 years.

 

Why would they not want that?

Gold backed currency means fiscal responsibility.  No country wants fiscal responsibility...

apberusdisvet's picture

I smell a Rothschild head fake

 

SSRI Junkie's picture

"IMF Greenlights Addition Of Chinese Yuan To SDR Basket: Wall Street Responds"

 

this means s&p up 30 points through e-minis on monday morning pre-open. gold hammered pre-open. any news is good news

Winston Churchill's picture

But why the volte face by the IMF ?

They delayed enty for a year, not even two months ago.

G20 meet today, looks like this was to forestall something else.

What ?

Seasmoke's picture

Well that was quick. Got Gold ??